HELSINKI, FINLAND – AUGUST 10: Charles Michael Friedek of Germany lays in the sand after his triple … [+] jump during the men’s Triple Jump qualifier at the 10th IAAF World Athletics Championships on August 10, 2005 in Helsinki, Finland. (Photo by Michael Steele/Getty Images)
212 firms in the S&P 1500 have not beaten even US treasuries over the last 10 years
Every year I put out a list of firms in the S&P 1500 that have not even beaten US treasuries over the last decade. To be clear, the benchmark return I am looking for is barely 14% over 10 years. That is barely roughly 1.1% per annum.
As of 10/22/2024, 212 firms in the S&P 1500 had not beaten what an ETF that held 10-year US Treasury bills would have earned. This count is lower than the 245 firms I found last year. The lower count is perhaps not all that surprising given that the stock market is up roughly 24% this year.
To understand movement in the list, I compared the 2024 list to the 2023 list and found, with the help of Wenqi Xie, that
· 39 firms left the 2023 list because they were kicked off the S&P 1500 index (labeled “discards.”)
· 47 firms left the 2023 list because their stock return performance improved enough for them to now beat US treasuries (“turnarounds”). These firms continue to stay in the S&P 1500.
· 53 firms newly joined the 2024 list of underperformers (“new entrant laggards”)
o Bizarrely, four of these were just added to the S&P 1500 in 2024. So, the following new entrants were sent to the sick bed right away: BioMarin Pharmaceutical Inc., Alkermes plc, EchoStar Corporation and Marathon Digital Holdings (MARA). The other 49 firms were on the S&P 1500 list before 2024.
o Prominent new entrant laggards include Gilead Sciences, Baker Hughes, US Steel, Southwest Airlines, CVS Health, Molson Coors Beverage, Intel, Devon Energy, Jack in the Box, Biogen, American Airlines and Saber.
· 159 firms in the 2024 laggard list also appeared in the 2023 list (“the continued laggards”). Hence, two thirds of the 2023 list is sluggish as it consists of continued laggards (159/245).
Turnarounds
Roughly 20% of last year’s laggards have done enough to get out of the doom list (47/245). A few prominent examples of under performers that left the S&P 500 list of laggards from 2023 include GE, Tapestry, Ralph Lauren, International Paper Company, IBM, AT&T, Western Digital, IBM, Citigroup, AT&T and Western Digital.
It is useful to consider why the turnarounds happened:
· GE was the turnaround story of the year as Larry Culp, the CEO, led a split of GE into three separate public companies: GE Aerospace, GE Healthcare and GE Vernova. GE (now GE Aerospace) is up 67% this year. GE Vernova is up 162% since the split whereas GE Healthcare is flat since the split.
· Tapestry, the owner of Coach and other brands, is up 72% this year. Tapestry bought back stock of $2 billion after a judge blocked its acquisition of Capri Holdings.
· Ralph Lauren is up 60% this year. The company has focused on high end fashion, invested in online sales channels, and has worked on initiatives to make the firm more responsive to customer tastes.
· International Paper is up 55% this year. The company merged with DS Smith, cut costs, divested from non-core assets, under the leadership of a new CEO, Andy Silvernail.
· IBM’s turnround is potentially attributable to a push for LLMs in enterprise AI, its hybrid cloud strategy and new CEO, Arvind Krishna’s, leadership. The stock is up by 41% this year (inclusive of dividends). I could not detect any significant investment or nudges from activist investors.
· Citigroup is up 40% this year. CEO Jane Fraser has restructured the group, tried to exit non-core markets, invested in technology, and attracted upgrades from sell side analysts.
· AT&T got rid of DirectTV, cut costs, prioritized investments in 5G and hence attracted new subscribers, bought back stock and maintained a high dividend payout. AT&T is up by around 35% in 2024. Did Elliott’s investment in 2020 have something to do with the turnaround?
· Western Digital capitalized on significant storage demand on account of AI. Revenues are up and operational excellence has improved in 2024. The firm has launched new HDD and SSD drives to cater to growing storage needs. The stock is up by 17% this year. Elliott is listed as an investor since September 2024 as per CAP IQ.
Continued laggards
As mentioned, 154 firms continue to show up as laggards. The prominent ones are Cheesecake Factory, Urban Outfitters, Marathon Oil, Murphy Oil, Harley Davidson, Bath and Body Works, Cracker Barrel, The Gap, JetBlue, Mattel, Footlocker, Schlumberger, Haliburton, Kohl’s, Yelp, Nordstrom (gone private since), Macy’s, Paramount, Warner Bros, Walgreens, and Tripadvisor.
As always, consultants, private equity operators, and shareholder activists: pay heed and assist in redeploying capital trapped in these enterprises to better use.
